Plan sponsors are advised to stay on top of communications with former employees who leave their 401k accounts behind. The fiduciary risks associated with “orphan” accounts stack up. Facilitating portability is also wise, as is putting protections in place.
Responsible to All Plan Participants
When an employee leaves a company, the company, obviously is no longer responsible to them—as an employee, but as Christopher Carosa reminds us in Fiduciary News, “There remains a responsibility to that person as a participant in the plan.” Indeed, experts underscore, as long as funds remain in the company sponsored retirement plan, “The plan sponsor has fiduciary liability over the funds, and they may not want that responsibility on former employees.” Though our “out of sight, out of mind” tendencies make it easy to forget about these responsibilities, they tend to stack up and become more burdensome over time. Experts offer these observations:
“Participants who leave money in a former employer’s 401k present a number of challenges for plan sponsors…First, the sponsors’ disclosure requirements apply to both active and inactive participants in the plan….If former employees are not diligent about maintaining contact information…they can easily become ‘lost’ participants which presents a whole new set of issues particularly since the Department of Labor has…some pretty clear expectations of the efforts sponsors and providers must undertake to locate these individuals.”
“An ‘orphan’ account…is an account that doesn’t have any active participants associated with it. This can create administrative headaches for the plan sponsor, as they now have to manage an extra account. Additionally, if the balance in the account is relatively low, it may not be cost-effective for the sponsor to keep it open. Finally, if the former employee doesn’t keep up with their required minimum distributions (RMDs) from the account, it can create problems down the road.”
Toward mitigating the risks associated with orphan accounts, a best practice for plan sponsors is to facilitate retirement account portability. As Tim Wood of Foster & Wood Investment Fiduciaries sums up:“401k accounts are meant to be portable, and everyone should be present with their retirement savings and pay attention to it. That is in their best interest.” Plan sponsors are also reminded that even with great diligence, errors and oversights occur, and under the high standards of ERISA law, mistakes can result in fiduciary breach allegations.That’s why it’s critical for plan sponsors to protect themselves from personal liability. Colonial Surety is here to help with an affordable Fiduciary and Cyber Liability Insurance Package that includes:
- Legal defense and coverage for penalties against claims of alleged or actual breaches of fiduciary duties.
- Defense against lawsuits and regulatory actions related to a cyber breach.
- Expert-led response, notification and crisis management services to prevent a cyber incident from spiraling into a disaster.
Our Fiduciary with Cyber Package is now available with a one year commitment—and the annual fee is less then one hour of expert legal defense if a lawsuit or regulatory challenge strikes you and your business. Let’s get you covered, in minutes, today: Protection for Plan Sponsors.
Increased Litigation Risks?
Another reason for plan sponsors to proactively prevent orphan accounts is the increased risk of lawsuits. As Matthew Compton of Brio Benefit Consulting points out:
“Terminated participant balances present several issues for plan sponsors….To start, a terminated participant is more likely to bring litigation against a plan sponsor than an active employee. Additionally, terminated balances can increase plan costs as most 401k recordkeepers are charging per balance held in the plan. Plan Sponsors also need to send out annual notices and plan-related changes to terminated participants that maintain a balance in the plan, which can be an administrative burden.”
It is easy to see how supporting outgoing employees to transition their retirement accounts, a practice sometimes referred to as “assisted rollout,” is good for both people and businesses. Of course even the most diligent plan sponsor, following all regulations and best practices, can never fully eliminate the fiduciary risks associated with the role, making protection essential. Unfortunately, with ERISA lawsuits on the rise, the U.S. Chamber of Commerce points out that there’s been an increase in the cost of fiduciary liability insurance—making it harder then ever for plan sponsors and other fiduciaries to mitigate their risks. Don’t forget: Colonial Surety is here to help. As a longstanding and trusted national provider of ERISA Fidelity Bonds, we are committed to ensuring that plan sponsors from businesses of every size can afford protection.
Colonial’s annual premium for fiduciary liability insurance costs less than just one hour with an ERISA lawyer if disaster strikes, and arms you with defense costs and penalty limits up to $1,000,000 in the event of a covered lawsuit. For added value, we even include 50,000 of basic cyber liability insurance, lock in multi-year rates and offer installation payments. Obtain protection, in minutes, now:
Pension plan professional? We’re here to help you with your plan sponsor clients—and we’ve got you too. From Errors and Omissions Insurance to Fiduciary Liability Insurance, Employment Practices Liabiity Insurance–and more, we’re HERE with the coverages pension professionals need to keep the business going—and growing. Insurance for Pension Professionals Right Here.
Colonial Surety was founded in 1930 and continues giving customers the assurance that they, their businesses, and their clients are safeguarded with the right surety and insurance products at all times. We are a direct and digital insurer offering products through an online platform supported with exemplary customer service. We give customers a simple, direct, and instant service that takes the pain out of buying insurance and bonds. Colonial Surety is licensed in every state in the U.S., rated “A” Excellent by A.M. Best, and listed by the U.S. Treasury as an approved surety.